On personal finance.

Loan burden increasingly harsh for grads

September 21, 2003|By Kathy Kristof, Tribune Media Services.

The day of reckoning is looming for Adrienne Frank, a magazine writer who graduated from college this summer with $25,000 in student loans.

In December, Frank has to start making payments on the loans, and she has to find a way to make those payments while whittling down a $5,000 credit card balance and meeting the day-to-day demands of paying rent and keeping up with her car payments.

Although Frank doesn't know exactly what her loan payment will be, she estimates that it will amount to making a second car payment each month.

"My husband is freaking out," said Frank, 25, a Tempe, Ariz., resident whose spouse is still in school.

Such uncertainty about being able to meet financial obligations is a growing problem among recent college graduates, experts say. About one-third of all recent graduates are unprepared to make their first student-loan payment, according to an August survey commissioned by Collegiate Funding Services in Washington, D.C. A year ago, fewer than one-fifth said they were unprepared to make that first payment.

The reasons are twofold, said Barry Morrow, chief executive of Collegiate Funding Services: Students are more indebted than ever, and they are walking into one of the worst job markets in a decade.

"We are seeing a real increase in the number of people calling us, saying that they are having trouble paying their loans back."

The unemployment rate for college graduates younger than 35 has doubled in the last three years, said Jared Bernstein, senior economist at the Economic Policy Institute in Washington, D.C.

"College graduates have been relatively immune from economic downturns historically," Bernstein said. "This time, they have been hit disproportionately hard."

The rise in unemployment among college grads has been steeper than the rise in unemployment among the population as a whole. Whereas 1.7 percent of college grads were unemployed in 2000, 3.1 percent are unemployed today, Bernstein said. The nation's overall unemployment rate is 6.1 percent, versus 4.1 percent three years ago.

What those statistics don't show is that the young graduates who do get jobs often are earning significantly less than they had expected, said Michael C. O'Brien, CEO of FinancialAid.com in San Diego. "The job climate," he said, "is just not what it used to be."

Meanwhile, the combination of rising tuition costs and a decline in grant-based aid has left students more indebted than ever.

Average student debt has risen 58 percent in the last decade, according to the College Board, a New York-based college testing and information firm. The average student was carrying a education-related debt load of $28,701 in the 2001-02 school year, compared with $24,375 the year before, according to the College Board's annual Trends in Student Aid report.

To make matters worse, most students--83 percent, according to the College Board's latest survey--also have revolving credit card debts, Morrow said.

The only bright note: Student loan rates are at historic lows. In July, rates on federally guaranteed student loans fell to 3.42 percent for loans already in repayment and to 2.82 percent for loans in deferment periods. (Borrowers are able to defer paying their loans until six months after graduation.)

Because of those low rates, graduates struggling under heavy college debt loads may want to consider a couple of strategies for making their payments more manageable. For instance, graduates who opt to consolidate their loans can lock in those low rates for the life of the loan, Morrow said.

Those who are heavily indebted and strapped for cash also can stretch out the repayment period--a move that can dramatically cut monthly payments. The repayment period on a typical student loan is 10 years. However, consolidation loans sometimes can stretch repayment over 30 years, depending on the student's total indebtedness. That could allow the borrower to use more discretionary income to pay off higher-priced debt, such as auto loans or credit card loans, or to save for retirement, O'Brien said.

Consider the effect on a hypothetical graduate who has $50,000 in student debt. On a traditional 10-year repayment plan, he would pay nearly $500 a month on the loan. If he stretched his repayment over 20 years with a consolidation loan, his required payments would drop to a bit less than $300 a month.